Multi-State Operator (MSO) is a term that has become specific to the cannabis industry. Regulations in cannabis that require very specific licensing, on a state-by-state basis, have given rise to owners having multiple legal entities in more than one state. For comparison, while Aunt Sally’s soaps can operate under one legal entity that sells into multiple states from her Etsy store, cannabis business owners that want to operate in both Maine and Vermont, for example, have to hold licenses in both states. Some states have regulations that say each of those licenses must be held by individual legal entities instead of one common parent.
Several challenges impact operating under these constructs. To state the obvious, it is a large undertaking from an accounting and administrative aspect to manage that many individual businesses. Each state essentially operates as its own stand-alone market within the cannabis industry, and idiosyncrasies vary from market to market. Almost as if operators were doing business in multiple countries. How you advertise in one space may not be plausible in another. What you can legally sell in one state may not be legal in another, making consistency a big challenge for MSOs. State tracking software has not really caught up to MSO structures, disrupting a multi-state operator’s ability to take advantage of economies of scale and eliminating the ability to share costs in some cases.
One of the biggest accounting and tax complications for MSOs is the issue of multi-state nexus and how to determine where, when, and on what sales dollars a multi-state operator may have a liability for, for sales tax purposes.
The U.S. Supreme Court case, South Dakota v. Wayfair, Inc., in which the court ruled that states may charge tax on purchases made from out-of-state sellers, even without the seller’s having a physical presence in the taxing state, has changed the nexus game for cannabis businesses. To make this issue harder, each state sets its own rules and regulations regarding sales tax, and nexus should be reviewed individually by the state.
Considerations you can start reviewing to help make nexus determinations:
- Where are your people and property?
Most of us know that when it comes to nexus payroll, property, and sales are all contributing factors to establishing a potential liability in almost any state. The MSO’s can get messy if they are sharing any of those things. As far as cannabis goes, most states have strict guidelines about individual license holders tracking their own sales. Meaning that even if the same owner holds multiple licenses, some states prohibit what are called “collectives,” which would essentially be multiple licenses operating as one entity. So what does that mean for your nexus considerations? Most likely, each individually licensed entity needs to consider their sales tax liabilities separately.
- Can a parent holding company file on behalf of subsidiaries in separate states?
Maybe. Keep point number one in mind, though. If a parent holding company has two licenses in one state, they most likely need to file two separate sales tax returns under each of the separate subsidiaries because the state, from a regulatory standpoint, expects these sales to be tracked separately. The Farm Bill passed in 2018 exploded online sales of CBD and other ancillary products with fewer regulations regarding crossing state lines. A parent could have multiple subsidiaries who sell into the same state even without having a physical presence. For example, a California parent could have a Nevada licensed subsidiary and a Colorado licensed subsidiary that both sell online into Washington state. In this scenario, the parent needs to consider the nexus created in all four states. In most cases, we still recommend considering separate returns for at least sales taxes for each entity. Since most of the THC products are going to require separate sales tracking by each entity, it seems most consistent to report CBD and other non-THC sales the same way.
- Be careful to analyze income tax nexus separately from sales tax nexus.
While most states now have minimum thresholds of $100,000 in sales and/or 200 transactions before sales tax returns are required, income tax nexus essentially starts with the first dollar. MSOs also have the opportunity to file a combined group return for income tax purposes, even if they are filing separate returns for reporting sales taxes. Filing a combined return for income taxes could help reduce administrative expenses and tax preparation fees for cannabis businesses but make sure the entity structure allows for a combined return.
Multi-state business operations can get complex quickly. When combined with an industry such as cannabis that is already laden with potential tax and accounting pitfalls, the issue can be completely overwhelming. Be sure to analyze each piece of the puzzle. With limited to no guidance still on the required treatment of MSOs, following individual state guidelines helps keep cannabis business owners in compliance with regulations.